Be Careful What You Wish For: Tel Aviv Edition

Israel struggles with its move from an emerging to developed market | “We went from a significant place in a market ... to no-man’s land”

Shoshanna Solomon

Daily Volume of Shares Traded On Tel Aviv Stock Exchange*


In the minds of many investors, Israel left the ranks of emerging markets in 2010. In May of that year, MSCI, the New York-based firm that builds popular investing indexes, added the country to its benchmark of developed nations. The promotion was a sign of Israel’s success: Its economy had recovered from the financial crisis faster than most advanced nations, and foreign money was pouring into its stock market. In 2009, Israel’s benchmark TA-25 stock index gained 75 percent. “We’re playing with the big boys now,” said Ester Levanon, then the chief executive officer of the Tel Aviv Stock Exchange (TASE), after winning MSCI’s approval.

Three years later, the reclassification is looking like a disaster. Before 2010, Israel accounted for 2.7 percent of the now $7 trillion MSCI Emerging Markets Index, giving it an outsized share of investor money allocated toward developing economies. Now, it makes up just 0.2 percent of the MSCI World Index, which has a cumulative market value of more than $33 trillion, according to data compiled by Bloomberg.

The change has forced Israeli companies to compete with those from the U.S., Europe, and Japan for fund managers’ attention and money. Since 2010, trading volume on the TASE is down about 45 percent. Initial public offerings have dried up, and big companies are choosing to delist or list elsewhere. “We went from a significant place in a market we wanted to move from to no-man’s land,” says Daniel Goldstein, the global head of sales at IBI-Israel Brokerage and Investments, which manages more than 27 billion shekels ($7.5 billion). Israel’s TA-25 index is up 9.1 percent since the MSCI reclassification took effect, compared with a 71 percent rise in the Nasdaq Composite Index as of close on Aug. 20.

In June, Kadimastem, a developer of stem cell therapies, became the first company to list on the Tel Aviv bourse since the end of 2011, compared with a record 56 IPOs in 2007, exchange data show. Companies that have pulled off the exchange include Hot Telecommunication Systems and Elad Canada, a real estate company owned by billionaire Isaac Tshuva. Mellanox Technologies, which listed in Tel Aviv in 2007 and makes equipment that speeds up electronic data transfers, says it was following competitors when it decided to delist its shares from the TASE effective Sept. 1. Shares of Mellanox trade on the Nasdaq in New York as well as in Germany. “There is no real business reason for Mellanox to stay and trade on the Tel Aviv Stock Exchange,” says CEO Eyal Waldman. “One suggestion may be to sell the TASE to Nasdaq or the like.” Nasdaq declined to comment.

The turmoil has prompted a feud between regulators and exchange officials over who’s to blame. On July 17, Levanon resigned as CEO of the TASE. Saul Bronfeld, chairman of the exchange since 2006, stepped down the following week. A former Bank of Israel chief economist, Bronfeld blames government regulations and slower economic growth for the exodus of investors and companies. “My resignation is a wake-up call for Jerusalem,” says the 71-year-old Bronfeld.

In July, Israel Securities Authority Chairman Shmuel Hauser sent a letter to the exchange blaming Levanon and Bronfeld for TASE’s problems, including their failure to update trading systems. Levanon resigned after being unable to secure a position for Israel on the MSCI Europe Index, which she said could have lured $2 billion to the country. Her efforts to attract technology listings to the exchange also fell short. Though Israel has more startups per capita than any country in the world, the TA-25 index includes just one technology company, Nice Systems. Levanon declined to comment.

Gilad Alper, a senior analyst at Ramat Gan-based Excellence Nessuah Brokerage, says government reforms in the telecommunications, banking, gas, and chemicals industries are keeping foreign investors from buying shares in Israel. After the government opened the telecommunications market to further competition in 2011, new entrants cut prices to attract customers. Shares of Israel’s largest telecommunications companies tumbled as much as 52 percent last year, making them the worst performers overall on the benchmark index.

The bourse named a search committee on July 29 to replace Levanon. Ron Malka, who’s heading the committee, was named interim chairman of TASE on Aug. 1. “The bourse cannot pull the carriage out of the mud alone, it needs help from the government,” says Yaniv Pagot, chief strategist at Ramat Gan-based Ayalon Group. “You need a team that can think differently.”

The bottom line Trading volume in Tel Aviv is off about 45 percent, in part due to the nation’s inclusion in a developed market stock index.


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